Risk ManagementTreasury Management

Managing FX in Currency Tiers to Control Cost, Workload

By January 30, 2020 No Comments

Why one company’s treasury spreads currency management among teams for large exposures, currency clusters and “tier two” currencies.

At a recent NeuGroup meeting of treasurers in Europe, one member shared how his company manages FX risk management-related costs and workload by considering currencies in tiers.

Global policy, local execution. Generally speaking, at this company, corporate treasury at HQ is responsible for the framework and policies and the global hedging approach, but local (in-country) treasury staff implement the hedging strategy with advice and approval from HQ.

Big countries have their own treasury organization. Some countries in the global group are so large relative to the size of the company and have their own currencies that they will have their own treasury. Other countries together form a “cluster” that also can be managed on its own.

But “tier two” countries don’t. Various tier two countries can be served directly by corporate treasury. Here, local treasury and in-country project controllers forecast and monitor FX risks resulting from purchase orders, sales orders and tender offers, but the exposure is hedged at the group level by corporate treasury.

Other tier two countries are served by local treasury, such as India, China, South America and Africa; here, risk identification is done as above but the exposure is hedged with local banks by local treasury. (However, the valuation of the local third-party hedges is performed by corporate treasury.)

Group guidance promotes the use of global currencies like USD or EUR for project tenders in emerging markets but when that is not possible, negotiators need to ensure that currency fluctuation clauses are in the contracts. Failing contracts in global currencies, local treasury consults closely with corporate treasury to monitor risk and manage the cost of hedging.

Ted Howard

Author Ted Howard

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